The Second Way to Improve Profits

A while back I wrote an article about improving profits having to do with controlling costs. I think we all struggle with this one. I know I do. I always have these ideas for new products so I go buy materials for it and then it just sits there because I am working on something else. Read “Increasing Profitability” for the details.

While controlling costs is important and will let you improve profits, another way to improve profits is to increase your pricing. 

We are all concerned with raising prices. You are afraid that people won’t buy want you are selling if it is too expensive. You are absolutely right.

However, there is an interesting psychological effect of pricing. Higher prices give the perception of higher value. One vendor that I know had a problem selling their products at $40. He put a “1” in front of it and his product started selling at $140. Why? Perceived value.

This raising of prices also is in direct conflict of my article “How to Price Your Products.” While that article is a good starting point, you are now ready really understand your customers and what they want to pay for your products. Yes, want.

Finding the point where people want to pay for the perceived value they are receiving is a delicate balance. Ever try to give away a refrigerator? You can put it on the street with a sign that reads “Free” and it will sit there for a week. Put a sign on it that says “$20” and someone will come along and take it in the middle of the night. Problem solved.

This is an example of perceived value. It is the same item, but the value is increased because you put a price on it. The same is true with your products. You increase the prices and the perceived value will increase as well – to a point.

Paintings are perfect example of perceived value. At is core, most paintings don’t cost much to produce. A canvas and some paint is all that you get when you buy a painting. You can get canvas and paint at the local craft store for a few bucks. However, when buying art, the purchaser is not looking at the canvas and the paint, they are buying the feeling that they get when they view that piece. That has far more value than the paint and canvas. Your products are a form of art in and of themselves.

If you increase your prices, the quality of your products must meet that price as well. You can’t sell random soda bottle tops for $100 each. However, if the soda bottle top came from the first bottle of soda ever produced, you may be able to get far more than $100 from the right person.

When you raise your prices, you may notice fewer sales.  This isn’t necessarily a bad thing. Lets say you have a product that you sell for $5. You sell 100 of them a month. After a price increase to $10, you may see that sales drop to 50 per month. If you do the math, it is still $500 in gross sales per month either way. You are getting paid the same for doing less!

This is only an example, but it does illustrate a point. What is your time worth? Do you want to sell products to make minimum profit or do you want to sell to make maximum profit?

While there is no magic formula of exactly what you should sell you products for, you have an opportunity to increase your prices if you can sell the perceived value. This means understanding your product, its value, your value, and your customers.

Try this. Increase all your prices by 10% for three months and see just how much it affects the number of sales. Then do it again. Over time you will be able to see what pricing the market will bear and you will be better off for it.

Until then, see you at market!

 

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